QUESTION
I am the COO of a mid-sized lender in the Midwest. We have contacted your firm to do an Anti-Money Laundering Risk Assessment. One of the big issues we have is trying to identify the most common red flags.
In streamlining our system AML reporting, we are using AI to determine common red flags. Unfortunately, AI is not able to provide real-world data. We need practical experience, which is why I would like you to let me know the kinds of common red flags you find in your audits.
What are the common red flags for money laundering in mortgage banking?
SOLUTIONS
RESPONSE
Since 2003, FinCEN has issued a number of analyses, reports, and advisories regarding emerging trends in mortgage fraud, money laundering, and terrorist financing activity involving residential mortgage loans.
While FinCEN publishes a list of potential red flags, we often find that our list of activities that could trigger the filing of Suspicious Activity Reports continues to expand. At this point, we have hundreds of such findings.
Thank you for retaining us to provide the AML Risk Assessment.
Lenders Compliance Group was the first compliance firm in the country to provide AML audit tests to non-bank residential mortgage lenders and originators. Of course, we have also offered AML audits to banks involved in residential mortgage banking for many years.
So, by this point, we have rock-solid indicia and identifiers that help us review for AML compliance. There are many common red flags. I am going to provide a half-dozen of them that keep turning up in our audits with the proviso that the list is not comprehensive.
Activities considered red flags in mortgage banking include:
(1) A loan secured by pledged assets held by a third party unrelated to the borrower.
(2) A loan secured by deposits or other readily marketable assets, such as securities, when owned by apparently unrelated third parties.
(3) A borrower default on a case-secured loan or any loan that is secured by assets that are readily convertible into currency.
(4) A loan made for, or paid on behalf of, a third party with no reasonable explanation.
(5) A customer, to secure a loan, purchases a certificate of deposit using an unknown source of funds, particularly when funds are provided via currency or multiple monetary instruments.
(6) A loan that lacks a legitimate business purpose, provides the depository institution with significant fees for assuming little or no risk, or tends to obscure the movement of funds (i.e., loans made to a borrower and immediately sold to an entity related to the borrower).
It is important to ensure that your system solution requires the reporting of any activity that is suspected of violating a criminal statute. Additionally, the federal money laundering criminal statutes consider money laundering to be the handling of the proceeds of criminal activity, with mortgage fraud considered to be a predicate offense for the money laundering criminal statutes. Mortgage-related criminal activity is a specific predicate offense.
Jonathan Foxx PhD., MBA
Chairman & Managing Director
